nep-fdg New Economics Papers
on Financial Development and Growth
Issue of 2014‒12‒03
five papers chosen by
Iulia Igescu
Ministry of Presidential Affairs

  1. The influence of different production functions on modeling resource extraction and economic growth By Voosholz, Frauke
  2. Debt Servicing, Aggregate Consumption, and Growth By Mark SetterfieldY; Yun K. Kim
  3. The Effects of Government Spending in a Small Open Economy within a Monetary Union By Clancy, Daragh; Jacquinot, Pascal; Lozej, Matija
  4. Unemployment and Innovation By Joseph E. Stiglitz
  5. Is the oil currency – oil price nexus affected by dollar swings? By Gabriel Gomes

  1. By: Voosholz, Frauke
    Abstract: In this paper we discuss the influence of using different production functions on modeling the resource extraction rates and economic growth. The focus is set on the modeling of the production sector, which requires either non-renewable resources, renewable resources or a combination of both resources for production. There are great differences between the possible assumptions when modeling the substitution process between the different input factors. It is shown that the existence of an optimal extraction rate in conjunction with economic growth depends on the specification of the production function even if the same parameterization is used. The target is to provide an overview on the different possibilities of modeling, and to support the decision which kind of production function should be used for modeling different aspects of economic growth.
    Keywords: economic growth,natural resources,production function
    JEL: E23 O13 O41 O40 Q20 Q32
    Date: 2014
  2. By: Mark SetterfieldY; Yun K. Kim
    Abstract: We develop a neo-Kaleckian growth model that emphasizes the importance of consumption behavior. In our model, workers first make consumption decisions based on their gross income, and then treat debt servicing commitments as a substitute for saving. Workers' borrowing is induced by their desire to keep up with the consumption standard set by rentiers' consumption, reflecting an aspect of the relative income hypothesis. As a result of this consumption and debt servicing behavior, consumer debt accumulation and income distribution have effects on aggregate demand, profitability, and economic growth that differ from those found in existing models. We also investigate the financial sustainability of the Golden Age and Neoliberal growth regimes within our framework. It is shown that distributional changes between the Golden Age and the Neoliberal regimes, together with corresponding changes in consumption emulation behavior via expenditure cascades, suffice to make the Neoliberal growth regime unsustainabble.
    Keywords: Consumer debt, emulation, income distribution, Golden Age regime, Neoliberal regime, expenditure cascades, growth
    JEL: E12 E44 O41
    Date: 2014–11
  3. By: Clancy, Daragh (Central Bank of Ireland); Jacquinot, Pascal (European Central Bank); Lozej, Matija (Bank of Slovenia)
    Abstract: Small open economies within a monetary union have a limited range of stabilisation tools, as area-wide nominal interest and exchange rates do not respond to country-specific shocks. Such limitations imply that imbalances can be difficult to resolve. We assess the role that government spending can play in mitigating this issue using a global DSGE model, with an extensive fiscal sector allowing for a rich set of transmission channels. We find that complementarities between government and private consumption can substantially increase spending multipliers. Government investment, by raising productive public capital, improves external competitiveness and counteracts external imbalances. An ex-ante budget-neutral switch of government expenditure towards investment has beneficial effects in the medium run, while short-run effects depend on the degree of co-movement between private and government consumption. Finally, spillovers from a fiscal stimulus in one region of a monetary union depend on trade linkages and can be sizeable.
    Keywords: Fiscal policy, Public capital, Imbalances, Trade.
    JEL: E22 E62 H54
    Date: 2014–09
  4. By: Joseph E. Stiglitz
    Abstract: This paper analyzes equilibrium, dynamics, and optimal decisions on the factor bias of innovation in a model of induced innovation. In a model with full employment, we show that (a) if the elasticity of substitution is always less than or greater than unity, there is a unique steady state equilibrium; (b) if the elasticity of substitution is less than unity, the steady state is stable, but convergence is oscillatory; (c) if the elasticity of substitution is greater than unity, the steady state is a saddle point; and (d) if the elasticity of substitution is less than unity for both high and low effective capital labor ratios but greater than unity for intermediate values, then there can be multiple steady states. In a model where efficiency wages lead to equilibrium unemployment, we show that if the elasticity of substitution is less than unity, there will be a bias towards excessive labor augmenting innovation, resulting in too high unemployment, with convergence to the unique steady state being oscillatory, rather than monotonic. Similarly, if the elasticity of substitution between skilled and unskilled labor is less than unity, and there is efficiency wage unemployment for unskilled labor only, there is will be excessively skill-biased innovation. This paper provides an alternative resolution to the Harrod-Domar conundrum of the disparity between the natural and warranted rate of growth to that of Solow, with strong policy implications, for instance, concerning the effects of income distribution and monetary policy both in the short run and the long.
    JEL: E24 O30 O31 O33
    Date: 2014–11
  5. By: Gabriel Gomes
    Abstract: This paper investigates to which extent dollar real exchange rate movements affect the relationship between oil prices and oil currencies. Estimating a panel cointegrating model between the real exchange rate and its drivers for a sample of 11 OPEC countries and 8 major oil-exporting economies over the 1980-2013 period, we find evidence to support the existence of oil currencies. To analyze how dollar movements may affect the oil price – oil currency nexus, we then estimate a panel smooth transition regression model. Results show that beyond a certain threshold for the dollar depreciation, the sign of the relationship between oil prices and oil countries’ exchange rate switches from positive to negative. In fact, when the dollar depreciation is higher than 2.45%, an increase in oil price has a negative impact on oil exporters’ exchange rate. We also re-explore the causality between the USD real exchange rate and the oil price, showing that the causality between the two variables has changed over the period under study. Finally, we investigate how the Fed monetary policy may impact the oil currency – oil price relationship, and find evidence to support that the US policy rate is a key to understand oil currencies movements.
    Keywords: Oil price; Oil currencies; Non-linearities
    JEL: C33 F31 Q43
    Date: 2014

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